Continuing with the information presented in #1 above, ABC has ICO of $1,800,000 and a corporate tax rate of 30%. Determine if ICO should be adjusted based on the following information:
On October 1, 2016, ABC received $360,000 cash in advance for the sale of merchandise to a customer. The contract specified that ABC would deliver their product in equal monthly quantities over the next five years. When ABC recorded the sale, the bookkeeper credited Sales Revenue. No adjusting or correcting entries were made although ABC has fulfilled their obligation to delivering the goods as stipulated in the contract. ABC did not realize the error until after the 2018 Income from Continuing Operations was calculated at $1,800,000.
a. Determine the adjustment for Sales Revenue affecting ICO for 2018: $
b. Determine the effect of this error on Retained Earnings (if any):
| Req a: | |||||
| As all the amount received in 2016 has been sales revenue instead of unearned revenue account and monthly revneue of $6000 shall have been credited.Therefore, Sales revenue for 2018 shall be increased by ($ 6000*12): $ 72000 |
| Req b: | |
| Now, retained earnings shall be adjusted for the past 2016 and 2017 years, As the revenue of 2018 is corrected in income statement as discussed above. | |
| Error in 2016 year: | |
| Sales recorded as | $360,000.00 |
| It shall have been for 3 months (6000*3) | -$18,000.00 |
| Revenues overstated | $342,000.00 |
| Error in 2017 year | |
| No sales recorded | |
| Revenue understated (6000*12) | -$72,000.00 |
| Retained earnings increased by due to error in 2016 and 2017 | $270,000.00 |
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